Depreciation is an expense recorded to allocate a tangible asset's cost over its useful life. Categorised as a noncash expense, accounting rules require an offsetting account to balance the books. Accumulated depreciation is the contra account used to offset the imbalance created by a noncash expense. It also can be used to determine the depreciated value of an asset.

- Skill level:
- Easy

### Other People Are Reading

## Instructions

- 1
Straight line depreciation reduces the value of an asset in equal parts over its useful life. The formula is: Purchase Price divided by Useful Life. There are accelerated methods of depreciation, however, that do not change the calculation for depreciated value.

- 2
For this example, let's assume you own a printing shop, and need to purchase a large font printer for £16,250. You can depreciate the value of the machine over a useful life of five years, and it will have no salvage value at the end of this period. That is, the value of the asset will be completely written off.

- 3
In our example, the annual depreciation is the purchase price ($25,000) divided by useful life (5 years), or £3,250. Every year, £3,250 will be written off to determine a new depreciated value of this asset.

- 4
To calculate Year 1 depreciated value, subtract £3,250 from the depreciable base of £16,250. In our example, this would equal £13,000. The new depreciated value of this asset is £13,000.

- 5
Calculate Year 2 depreciated value by subtracting £3,250 from the depreciated value of £13,000. The new depreciated value of the asset is £9,750.

- 6
Subtract £3,250 from the depreciated value £9,750 to calculate Year 3 depreciated value for the answer: £6,500.

- 7
Calculate Year 4 depreciated value by subtract £3,250 from the Year 3 depreciated value of £6,500 for an answer of £3,250.

- 8
To find the final, Year 5, depreciated value, subtract £3,250 from the depreciated value of £3,250 to arrive at the final answer of 0.